How VW Overcame the Test-Rigging Scandal to Emerge as #1

August 12, 2017

In 2016, Volkswagen sales across the world totalled 10.3 million, a shade higher than Toyota’s 10.2 million. General Motors, the only American automaker in the top three, did not make the 10 million mark. Its global sales stood at 9.6 million for the year.

The fact that the German automaker beat its rivals came as a surprise to many. A little over a year earlier, Volkswagen seemed to be in deep trouble.

In September 2015, the Volkswagen emissions test-rigging scandal erupted in the US. The deliberate manner in which the 78-year-old firm had duped authorities and consumers seemed to indicate that a return to normalcy would be difficult, even impossible.

But the company remained unfazed and the rest of the world took the wrongdoing in its stride. Sales, at a global level, kept increasing and VW retained its premier position in the auto sector.

How serious was the emissions scandal and did Volkswagen really deserve all the bad press that it received at that time?

What was VW’s emissions test-rigging scandal about?

Traditionally petrol cars have dominated the US market. Only about 3% of the cars sold in the country are fuelled by diesel. The percentage in Europe? Approximately half the market is for diesel cars.

Volkswagen saw an opportunity to grow its sales in the US by pushing its diesel range. Its marketing campaign said that VW’s diesel cars had very low emissions. But the Environmental Protection Agency, the federal body tasked with reducing pollution, found that Volkswagen had installed a “defeat device” in many of its models.

Approximately 482,000 cars including the Audi A3 and the VW branded Jetta, Beetle, Golf, and Passat carried software that resulted in falsifying the results from emission testing.

How did these “defeat devices” work? The software in the car monitored speed, engine operation, air pressure, and the position of the steering wheel. It could recognise when an emission test was in progress. At these times, the computer program kicked in and controlled engine activity so that emissions were minimised and the car met the required norms.

But pollution levels spiked in real driving conditions. According to a report on BBC News, the cars with this hidden software emitted nitrogen oxide pollutants that were up to 40 times the permissible limit in the US.

The Fallout

Soon after the news and the public outcry, VW CEO Martin Winterkorn resigned. Michael Horn, the head of US operations at that time, said, “We’ve totally screwed up.” He left the company in March 2016.

But senior level resignations were not the end of the issue for the company. The fine that the company could have been liable to pay for fudging emission results was US$37,500 per vehicle. That added up to over US$18 billion for almost 500,000 affected cars in the US. VW said that a total of 11 million cars across the world had the bogus software installed. It promised to recall 8.5 million in Europe and 1.2 million in the UK.

European Union emission norms are lax

It is widely known that EU emission norms are less stringent than the rules in the US. But it is interesting to understand how they work. In fact, the test-rigging scandal in the US could have its roots in the manner in which European companies comply with the law in their home countries.

Opel, which is General Motor’s German brand, recently responded to an accusation of fabricating its emission results. The company’s explanation and its insistence that it had not violated any rules is revealing.

Here is how EU laws work. A car manufacturer is allowed to deactivate emission controls to prevent the engine from harm. Auto companies are allowed to determine for themselves the parameters that they will use to trigger an emission control shutdown.

Opel programmed its cars to deactivate emission controls in the following conditions:

– When the ambient temperature was below 20°C or above 30°C.

– At speeds exceeding 145 km/h.

– When the engine speed exceeded 2400 RPM.

– When the car was at an elevation of 850 meters or more.

Why did Opel select these limits? It seems that EU emission testing is always done at temperatures between 20°C and 30°C, at speeds less than 145 km/h, and the engine is never made to exceed a speed of 2400 RPM. The elevation of the EU’s highest testing centre? 800 metres.

Rescued by China

Despite the fallout, Volkswagen remains a force to reckon with in China. The company sold 3.98 million cars there in 2016. This figure includes the sales made by its two joint ventures in the country, one with SAIC Motor and the other with China FAW Group, and is 12.2% more than the previous year’s sales.

China alone gave the company additional sales of 434,000 in 2016. This number played a key role in boosting VW’s global sales.

VW is a strong brand

The second big factor for VW’s recovery is its strong brand. Despite the emissions crisis, prices of used Volkswagen cars continue to command a premium according to a Reuters report. Clearly, buyers don’t seem to be greatly affected by the bad press, and still have great faith in the company.

In the first six months of 2017, the world’s top three automakers are still neck and neck, but Volkswagen has lost the top slot.  General Motors is not in the top three at all. Renault is leading with sales of 5.27 million, a growth of 7% over last year’s comparable period. Volkswagen is at #2 with 5.16 million and Toyota is third with 5.13 million.

VW’s future seems assured. Its position in China is unassailable. It is also making a strong bid to dominate the electric car market. Volkswagen says that it will sell one million electric cars by 2025. That puts it in the same league as Tesla, which is targeting production of a million cars by 2020.

In addition to electric cars, the company is also making large investments in its traditional area of diesel and petrol powered vehicles. In 2015, its budget for development expenditure was 11.9 billion Euros. That’s 65% more than the total amount that Fiat, Renault, and Peugeot planned to spend.

about author

Ravinder Kapur is a Chartered Accountant and has been affiliated with various interests in the financial services industry for more than 30 years. His financial expertise includes the vehicle and automotive sectors, as well as corporate finance.